A new question
from “PeteD” was received on the post “Recommended
Option Strategies: Decisions to Make Before Trading an Iron Condor. Part III”
when talking about which strikes to choose, you seem to compare "distance
neutral" with "delta neutral" – wouldn't they be basically the
same thing? i.e., if a call has a delta of 7, and a put has a delta of 7, can
you not basically assume they will be a similar distance out of the money?
say in the post that "…you may choose to sell spreads with equal delta.
I don’t recommend this method for iron condors…" – yet you don't mention
why you wouldn't recommend this method? In light of your answer to my first
question, I am interested in some reasons for this comment…
Peter (my blog is at www.options.freeblogit.com)
the second question first:
Be or Not to Be Delta Neutral
When comparing spreads that equally far out of the money, the call
spreads have higher deltas than the puts, unless you choose options that are
very far out of the money (FOTM). To be
delta neutral, you must sell extra put spreads or choose puts with a higher delta – and that means they are a little
closer to the money (CTM). Neither appeals
to me. We all recognize that if a huge
move occurs over a very short time, it’s more likely to be a downside move, and
I’d rather trade delta short than sell extra put spreads. Of course, my comfort zone is not yours, and
you should choose positions that allow you to sleep at night.
Let’s look at an
RUT closed at 702.37. Choosing to sell options
that are 50 points OTM, we buy the following iron condor:
RUT Sep 640/650P; 750/760C
(To buy the iron condor, sell the 640/650 put spread; sell the
750/760 call spread)
Using ‘Option Trader’ from Interactive Brokers:
Call spread: 5.40 delta each
Put spread: 3.23 delta each
Conclusion: if we sell 10 call spreads, we become short 54 deltas. To be delta neutral we must sell a CTM put
spread or sell 16 of the 640/650 put spreads. Personally, I don’t like either choice and prefer to sell 10 of each.
That would leave me with a position that is delta short, but it just feels more
neutral to me. I’m not recommending that
anyone choose distance neutral – instead I recommend being certain you understand your risk when choosing a delta neutral iron condor.
sell option spreads that are much further OTM, then the difference between the delta
of the put and call spread narrows (and gets closer and closer to zero). At that point, delta neutral and distance
neutral are just as you say – almost exactly the same. Because you were speaking of options with a
delta of 7 – and that means FOTM options – it’s true that in those situations ‘distance
neutral’ iron condors will be essentially ‘delta neutral’ as well.